New Delisting Regulations: Is Sebi Playing into MNCs’ Hands?
In proposing regulations to protect minority shareholders’ interest when the dominant stake holder wants to delist, Sebi looks to strike a balance. Will it benefit the small shareholders, or legalise MNCs’ act of depriving small shareholders a share of India’s growth pie, asks ReenaZachariah
hances of a married couple sitting across the table, with one saying, “I want a divorce,” and the other saying, “Fine, let’s go ahead,” are improbable. Usually, one spouse sets the ball rolling on a separation while the other resists. The person who resists will either reluctantly let go or will fight it out but not without seeking his or her due share. Similarly, when promoters attempt to delist their companies, minority shareholders often resist such moves but with no success. “Delisting is like a forced divorce,” a senior capital market regulatory official said at a meeting. “The investor has the right to ask what is due to him. If the promoter can pay, go for divorce. If you are not able to pay, remain listed.” Sebi’s stance on this stems from its concern for minority shareholders whom it reckons should not lose out in the bargain. Delisting, which leads to the removal of a company’s stock from the bourses favours promoters, enabling them to exercise greater control over the businesses. Once the stock is delisted, minority shareholders will not enjoy the luxury of liquidity offered by stock exchanges. So the regulator wants to ensure that such shareholders gain the most before delisting. With this in mind, a few weeks ago, Sebi proposed revamping the five-year-old delisting rules. The regulator’s internal analysis of 38 delisting offers between 2009 (when Sebi introduced delisting regulations) and 2014 revealed that 29 offerings were successful (differently put, almost 24% failed). The analysis showed that some of the delisting offers succeeded because of a tacit understanding between promoters and investors while some failed as the exit price discovered through the reverse book building (RBB) process was unduly influenced by speculators. In both cases, minority investors were left in the lurch. “The more recent experience with delisting has been that a few shareholders hold out for a higher price, holding the process to ransom,” said Amit Tandon, founder and MD of IIAS, a proxy advisory firm.
To gain a better picture of the delisting scenario, the 38 offers need to be classified into two distinct buckets — those relating to MNCs and the ones relating to Indian companies. A further analysis of the data showed that 12 of the 19 MNC offerings were successful (which also means that 40% failed) and in case of Indian offers, 17 out of 19 succeeded (the failure rate being 11%). Moreover, the average premium (difference between exit price and floor price) in MNC offers was three times the premium for Indian companies. The high premium is also because the India units have emerged as a jewel in the crown of MNCs businesses even as they grapple with slow growth in their home countries. Lenient FDI rules and removal of caps in many sectors too have allowed MNCs to hold a tighter grip over their local arms. In HSBC InvestDirect’s delisting offer, the exit price was ` 400 against the floor price of ` 124, a super premium of 223%. Further, in case of seven Indian companies, the premium to floor price was 0%, which means investors tendered at the floor price despite the RBB mechanism allowing them to bid higher. In contrast, in MNC offers there was not a single offer where the exit price was at 0% premium to the floor price. “The remarkable divergence in trend with higher number of successful offers by Indian companies that too at lower premiums points to market realities that need to be recognised before generalising,” said Mehul Savla, director, RippleWave Equity Advisors. Sebi is considering a host of reforms such as modification of RBB process, mandatory tender by minimum number of shareholders or shares and introduction of a fixed price mechanism and counter offers in an attempt to facilitate a fair and transparent exit price for small shareholders. “The draft Sebi guidelines — offering a broader set of price discovery options, attempts to tilt the balance from a handful to a larger set of shareholders,” said Tandon of IIAS. In the proposed RBB process, the exit price will be determined based on the price at which shareholders representing a requisite number of shares tendered are willing to exit. In such an approach, the bid of each shareholder counts unlike the current system where only the bid of the largest shareholder counts. Yogesh Chande, associate partner at Economic Laws Practice feels that allowing retail investors to bid at the cut-off price similar to an IPO process will be helpful compared to the RBB process. “The cut-off price has persuasive value for retail investors, as has been the experience in case of an IPO,” Chande said. However, Savla of RippleWave has a different view on cut-off price. “In an IPO, this makes sense since IPOs require minimum 60% participation from QIBs who are sophisticated investors with good research skills and are well equipped to do the pricing of an IPO. In delisting such a facility
Cshould not be allowed.” To ensure a high success rate, Sebi plans to allow acquirers to make counter offers. If the exit price is at a significant premium to the floor price, which is unacceptable to the promoter, the acquirer will have the option to make a counter offer. Regulatory data showed that acquirers had rejected the exit price or discovered price in a few offers. Some analysts are of the view that unlike the RBB mechanism, which is not followed in most developed markets, Sebi’s move to allow companies launch delisting offers at a fixed price will be a good step. “This is the best option as it is democratic and unless enough investors participate the offer would anyway fail. Since it is a fixed price offer, old investors do not have the confusion related to RBB and may prefer to participate rather than sell in the market,” Savla said. “The concern of companies taking advantage of bad markets to delist at a lower price is valid. But investors have the right not to participate in such times if they believe in the long term potential of the company. By the same logic, if a company does an IPO in a rising market and then later markets decline leading to a fall in share price, should IPOs be disallowed in such markets so that investors do not lose money?,” counters Savla. There were instances of MNCs short-changing minority investors. Fresenius Kabi Oncology, a healthcare firm, was accused by the regulator of colluding with investors to ensure that it delisted the firm. Since it could not delist at first, the controlling shareholder sold some shares to a bunch of investors who in turn sold them back to the promoters enabling them to delist the stock.
Sebi’s move to freeze trading during the last three days of the offer period could stem volatility in the tendering process, brokers said. Also the plan to allow depository receipt holders to tender their shares, provided the beneficiaries are known, could boost public participation in delisting. Sebi is also considering shortening the timeline required to complete the delisting activity to 64 days from 137. Investors may also be allowed to tender shares through the stock exchange platform against the RBB system of tendering shares through an off-market deal. Tendering of shares through RBB attracts higher capital gains tax compared to a transaction through the stock exchange which attracts the nominal securities transaction tax. “Allowing depositary holders to participate, making the exchange platform available, a tighter time-line, a single threshold, all tell us that Sebi is listening to the market,” said Tandon. Chande of Economic Laws Practice suggests that Sebi could consider bringing back the concept of delisting pursuant to the rights issue. “If as a result of the rights issue, the public shareholding required to be maintained for continuous listing in the company falls below the prescribed limits, the company will comply with the provisions of the delisting regulations by offering to buy out the remaining holders at the price of the rights issue and as a result of which the shares of the company will be delisted.”All these suggestions appear to be sensible, but the challenge for the regulator will be to strike a balance between securing a fair deal for minority shareholders and for a company to pursue a certain course in an open economy, without jeopardising the interests of stakeholders.